Reports warn of finance trouble

Groups: Time to address pension costs is now

Groups say time is of the essence when addressing the pension situation.

Groups say time is of the essence when addressing the pension...

Some city leaders have spent years standing in the town square, hollering themselves hoarse that Houston's financial footing is unstable, that huge pension costs threaten the city's future ability to police the streets, pick up trash and maintain parks.

In recent weeks, they've been joined by two others with bullhorns: The Greater Houston Partnership and the Arnold Foundation.

The region's most influential business group and one of its best-funded think tanks each has released a formal paper focusing on city finances and pensions, arguing in varying degrees that action - or at least an honest discussion of the way forward - is urgently needed.

Marc Watts, who chairs the GHP's Municipal Finance Task Force, acknowledged some city leaders long have sought the partnership's help in addressing their budget struggles.

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By the numbers

$2.4 billion: Size of city's general fund, which uses property and sales taxes to pay for services such as police, fire, trash pickup, parks and libraries

$3.2 billion: City's unfunded liability that has built up in the police, fire and municipal pension funds

8.5 percent: Investment return assumed by the fire and municipal pensions; the police plan reduced its target to 8 percent

Over $6 billion: Unfunded liability the Arnold Foundation estimates would result from dropping the assumed investment return to 7 percent

"There were efforts in the past that were aborted because it can be such a contentious issue. But I think the issue now has got to be addressed, and we're willing to be a partner to help solve the problem," Watts said. "We're going to push this to a solution to the maximum extent of our capacity. We can't wait."

Both groups' initial papers were largely informational, covering few facts unfamiliar to those who have followed public discussion of city finances. Each organization plans to release more detailed reports in the coming months.

Watts said the partnership's goal, for now, is voter education. He said his group views itself as most effective in a "fair arbiter" role.

"It's not because we're afraid to put forward a solution. It's because we think that would make us less effective," he said. "The partnership is not normally comfortable in a role of being out front on an issue that could be considered controversial. We're only here because we feel like for the good of the city of Houston, for our families, for the future of all of us, somebody has to do it."

'Critical' voters aware

Once Houstonians elect a new leader this fall to replace term-limited Mayor Annise Parker, Watts said, the GHP will throw its weight into finding and pushing a solution ahead of the 2017 legislative session. The city's pensions are controlled in Austin, not by City Council.

Arnold Foundation report co-author Josh McGee said the foundation's goals are less ambitious: to contribute to a discussion of the complex pension issue in a productive way.

Still, Rice University political scientist Mark Jones said it's important that both groups are weighing in now because, since the advent of Houston's term limits regime in 1991, no incumbent mayor has lost.

"Thus it's critical that Houston voters and elites be aware of the grave financial situation Houston is in and at least in part choose the next mayor based on that mayor's capacity to address these significant financial problems," Jones said. "At a minimum, the GHP and the Arnold Foundation are preventing the candidates from avoiding the discussion of city finances."

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The GHP's report explains how dollars flow into and out of the city's $2.4 billion general fund, which draws mainly on property and sales taxes to pay for basic services such as police, fire, trash pickup, parks and libraries. It also focuses on the rapid growth of pension payments and, because even these rising payments have not kept up with the growth in costs, the $3.2 billion unfunded liability that has built up in the police, fire and municipal pension funds.

The Arnold Foundation's report accuses city leaders of mismanaging the pensions, in part by using risky assumptions about future investment returns to artificially depress the annual payments required from the city. Despite this, the city still has failed to cover these lower payments to fund the benefits being promised.

The report advocates for moving control of pensions from the Legislature to local leaders, for implementing what the authors argue are more prudent policies guiding how the plans are funded, and for paying the full annual amount that policy change produces.

For instance, the firefighter and municipal pensions assume they will earn an investment return of 8.5 percent, the highest in the country; the police plan recently reduced its target to 8 percent.

Dropping the assumed investment return to 7 percent, the report estimates, would drop the plans' overall funding level from 75 percent to 63 percent and roughly double the unfunded liability to more than $6 billion.

Overall, in part because lower investment returns would require the city to cover the gap by paying more money into the funds, the policy changes the Arnold report advocates would increase the city's annual pension payment. For instance, the current $308 million general fund payment would rise to between $354 million and $385 million.

Mayor frustrated

Parker praised any attempt to raise awareness of the city's financial problems but made no effort to hide her frustration with the reports. In her view, the papers ignore that city pensions are controlled by the Legislature and independently elected pension boards, not City Council.

"Where were they when the Legislature was in session?" Parker said. "There's one item on that list from the Arnold Foundation that the city could actually do, and that is we could fully fund all of our pensions. I'd be parking police cars and fire trucks and closing in parks and closing in swimming pools and closing in libraries. I could do that, and maybe that would get the Legislature's attention? I don't think that that's good government. … Why would I want to put more money into a broken system?"

McGee said if layoffs and service cuts would result from fully funding the pensions, then that's a conversation city leaders should push, using realistic data on future costs.

"I'm not saying they immediately have to jump from here to there, but I'm saying we should be moving in that direction," he said. "The city leaders should be now instigating this discussion. Saying, 'We shouldn't pay more into a broken system,' doesn't fix anything. It just makes the problem worse in the future."

Differing responses

Some stakeholders, of course, see no problem worth discussing.

Todd Clark, who chairs the fire pension board, said the GHP and Arnold Foundation reports do not change his views.

"They have their thought process on what they think needs to be done, but I'll say it again: Pension reform is not the answer. The city spends their money on all these wasteful pet projects," Clark said, mentioning hiking trails, bike lanes and dog parks. "They just keep on harping on this, and the bottom line is the city just owes the money and they need to pay what they owe."

The fire pension has met its 8.5 percent investment return over recent decades, Clark said, and expects to over the long term, as well. The fund was on target to finish the last fiscal year well below its target, however.

Rhonda Smith, executive director of the city's municipal pension fund, called for any discussion of city finances to include not only pensions but the slowing local economy and the voter-approved cap limiting the revenue Houston can collect in property taxes.

Of the GHP and Arnold Foundation reports, she said, "Some of the perspectives lack the historical and factual background necessary for productive and informed discussion."

Some City Council members welcomed the reports.

"Whatever the civic groups and the citizens can do to focus on the financial concerns that we have ought to be done. I certainly welcome that," said Councilman Oliver Pennington. "The only way we're going to get where we need to be is by focusing on the specifics."

Councilman C.O. Bradford agreed.

"It's good that some entity outside of City Hall is going to start looking at some of the serious issues confronting our city - whether it's infrastructure, public safety, transportation - because the local governance process in Houston is woefully broken. The infrastructure issue isn't something that just happened over the course of two days or two years. The same thing about the city's finances."